Perception v. Reality of Economic Nexus

What struck me the most regarding the South Dakota v. Wayfair, Inc. decision, was not the decision or reasoning itself, I have long suspected the Supreme Court would rule in favor of the states. What surprised me the most was, the genuine lack of understanding of the current structure of the Streamlined Sales & Use Tax Agreement (and the fact that it does not apply to all states). I believe businesses need to be aware of the perception vs. reality, where the perception may have been provided in the opinion of the court, the briefs filed on behalf of the case, or the press & professional opinions post ruling.

Perception:  I can get free sales tax software from my e-commerce platform.

In the Opinion of the Court, page 20 Justice Kennedy states:

…South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

Reality:  Free software is available through the Streamlined Sales and Use Tax Agreement with Certified Service Provider’s (CSP’s). However, this is only free to remote sellers who are considered volunteer sellers. Volunteer sellers are defined as remote sellers who do not meet the $250,000 state gross sales threshold.  Furthermore, there are only 24 states within the Streamlined Sales and Use Tax Agreement, the five most populous states in the country are not members. To see a chart of member and non member states, click here.

Though there are 24 streamlined sales & use tax states, as of January 1, 2019 there are 38 states with economic nexus standards. To see a list of economic nexus rules and thresholds, as of January 1, 2019 click here.

Perception:  Products can easily be classified using free taxability matrices.

The National Association of Certified Service Providers and The Software & Information Industry Association stated in their brief to the court:

The process has four basic steps: (1) fill out some basic information about the business, (2) choose the States in which to collect tax, (3) connect the tax software to your e-commerce platform, and (4) tag your products with category labels. Whether you sell in one State or in many, the steps are identical (and only need be done once for each type of item sold). Every retailer tags products anyway, and after the tagged products are linked with tax software (which will likely need to be done for the State in which you have physical nexus) all it takes to collect and remit tax in additional States is the click of a button.

Each category of items that is treated differently by some jurisdiction in the United States has its own code. The software is provided by a team of tax professionals who continually update the programs to keep abreast of changing tax codes, and in the case of Certified Service Providers, those updates are certified by participating States. And the software, not the retailer, does the work of keeping track of whether an item is taxable or not in any particular jurisdiction. All the seller needs to know is what they sell.

Reality:  Only 24 of the 45 states with sales and use taxes are Streamlined Sales and Use Tax full member or associate states and therefore only those 24 states certify the result of these taxability decisions. What about the non-member states? Non-member states do not have a standardized product taxability matrix, and some cases not even standard taxability within it’s own borders (e.g. Colorado & Alabama).

Even when CSP’s are utilized, many products require more granular levels of classification than the CPS’s actually provide as options within the product mapping exercise.

eBay, Inc. in it’s brief to the court indicated that it sampled some of the products sold on it’s site to a CSP’s product offerings, stating that frequently the number of options available in the matrix did not provide enough detail to properly map the product being sold:

The free version of TaxCloud.net cited by South Dakota does not bring many of the distinctions listed above to a vendor’s attention. To offer just one of many possible examples, although TaxCloud.net correctly computed the New Jersey sales tax rate for “clothing” as 0%, it incorrectly computed the rate for “scarves” as 6.25% (TaxCloud.net category “Clothing: scarves”). The correct rate for scarves sold into New Jersey is 0%. Notice: Sales and Use Tax Exemption for Clothing Under the Streamlined Sales and Use Tax Law, N.J. Div. of Taxation, 1 (revised 9/1/06)... A vendor using the TaxCloud.net software touted by South Dakota in its brief therefore would have over-collected New Jersey sales tax on its sale of scarves—an error,…that would subject the seller to suit by overcharged purchasers.

Perception:  Streamlined sales & use tax states will give remote sellers immunity upon audit assessment.

As stated in the first perception, Justice Kennedy in the opinion of the court:

…South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

Reality:  Immunity may be provided to sellers using Certified Service Providers, only to the extent that the Certified Service Provider applied the improper rate or tax decision due to an error in data, in member states. Meaning, if the seller improperly mapped the product using a valid taxability matrix, the seller would be liable, not the Certified Service Provider. Not to be forgotten that this immunity applies to member states only, therefore if a seller improperly mapped the product within a non-member state, the seller would be liable for the tax variance within that state as well.

An excerpt from the Streamlined Sales Tax Governing Board, Inc. 2018-2020 contract with CSP’s (listed as “Contractor” party) outlines this '“immunity”:

E.3. Relief from Liability: Erroneous Data. Each Streamlined State shall, pursuant to the terms of SSUTA Sections 306 and 328, relieve the Contractor, and any Seller registered under the SSUTA with which the latter contracts, from liability to the states and their local jurisdictions for having charged and collected the incorrect amount of sales or use tax resulting from the Contractor or any of its SSUTA-registered contracting Sellers relying on erroneous data on tax rates, boundaries, or taxing jurisdiction assignments which have been listed in the state’s rates and boundaries databases, and erroneous data provided in the taxability matrix provided by the Streamlined State pursuant to Section 328

Perception:  I will not have to reveal my consumers' private purchase details.

In Amazon.com, LLC v. Lay (U.S. District Court, W.D. Washington, No. 2:10-cv-00664-MJP, 2010) the North Carolina Department of Revenue argued that it could not properly assess Amazon for sales & use taxes without bill to name, ship to address (street, city and zip code) and product level information. This information, as stated by Amazon, would have allowed the Department of Revenue to learn the “title and description of every book, DVD, music selection or other item” purchased by every North Carolina customer. The district court ruled in favor of Amazon, indicating that the Department of Revenue’s request violates the First Amendment and the Video Protection and Privacy Act.

Reality:  In order to determine the appropriate tax decision, bill to name, ship to address and product purchased are necessary, that issue in fact was never in dispute.

Amazon.com, LLC has agreed to release seller information to state Department of Revenue’s when confronted with valid legal requests. As an example, in May, 2018 Amazon sent a notification to North Carolina sellers, which read in part:

Amazon has received a valid and binding legal demand from the North Carolina Department of Revenue (DOR) requiring that Amazon disclose the following information about your business:…

To comply with our obligations under the law, we plan to provide this information…for all Amazon.come sellers who have elected to use our tax calculation services for sales to customers in North Carolina.

This will expedite the DOR’s requests for consumer information from the remote sellers in several states. Sellers in North Carolina, Rhode Island, Massachusetts and Pennsylvania have received similar letters. I worry that sellers will not be armed with enough information to raise the red flag of privacy violations when DOR auditors request personally identifiable information that violates the First Amendment.